Springtime for madcownomics

Should Creutzfeldt and Jakob get the Nobel prize in economics? Probably, except that they are dead, and did not really foresee how the mad cow disease would hit the economic sphere.
Under the impulse of Eurostat, European Countries are now supposed to include parallel activities — in particular drugs and prostitution — in their GDP computations. The pro argument is that these are mutually profitable transactions, and, as they are legal in some countries, it will facilitate cross-country comparisons. A similar adjustment takes place for owner-occupied housing, which contributes to GDP in the form of imputed rents. This allows to eliminate the bias that countries where renting dominates have an artificially greater GDP than those where owning dominates.

Where the mad cow disease strikes is here: How can the same government decide that an activity is illegal, ergo harmful, and at the same time include it in GDP, i.e. decree that it raises welfare? And, furthermore, if it is illegal, how are we supposed to measure it? And why should national accounts be harmonized between a country which thinks that drugs are bad and a country which thinks that drugs are good? [1]

Another pro argument, beyond ludicrous, is that those computations will mechanically reduce the debt/gdp and deficit/gdp ratios, making European countries look better in terms of “Maastricht”. Except that the reason why we divide debt or deficits by gdp is that we want to express them in relation to some measure of the tax base that will serve to pay back the debt. Including an illegal, and therefore untaxed activity is therefore absurd.

There is no limit to what can be included in GDP. When you watch TV, your TV is performing a service. The TV channels’ advertising revenues widely underestimate the value of this service (in fact they value a totally different service, the grabbing of your attention, which generally comes as a deduction of yoour own utility of watching TV). We could well impute the value of watching TV in GDP. There is no logical difference between doing this and imputing owner-occupied housing. In both cases we put a price on a service that people provide for themselves with the capital they own, so as to make it comparable to the same service sold on the market.

It turns out that each French person above 4 on average spends a daily 3 hours and 50 minutes in front of TV. Let’s make it 4 hours. We can value that on the basis of the price of movie theaters, which is something like 8 to 10 euros for a 2 hour sequence. As many people watch TV because they are not willing to pay that amount for what they see, we have a little bit of a truncation bias here, so let us divide this amount by 2. This eventually values the hour of TV watching at 2 euros per hour. Let us make these 4 hours 2 hours, because some people actually watch pay-tv, which is recorded in GDP. Putting these things together, the value of watching TV is evaluated at 2*2*365 = 1500 euros per year. There are some 60 million French people above 4. We should therefore raise French GDP by 90 billion euros, i.e. 4.5 points of GDP.

[1] In France and other places, the buying of sex is illegal, but the selling of sex is not. Similar absurdities prevail for drugs. For Marxists, feminists, and their ilk, there are no such things as good actions and bad actions; only good people and bad people. A voluntary transaction between a good person and a bad person is therefore good and bad at the same time. From there the Marxist/Feminist has two escape routes. He can claim, in an Orwellian fashion, that good = bad. Or, he can decide that good people are not endowed with free will, implying that the transaction is not voluntary. In the latter case, the life of the good people (women, the poor, etc) has to be regulated by the government. But, if good people have no free will, regulation can only be enforced by bad people…

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One thought on “Springtime for madcownomics

  1. I do tend to agree, except on the ‘How can the same government decide that an activity is illegal, ergo harmful, and at the same time include it in GDP, i.e. decree that it raises welfare?’. Isn’t it a too strong assumption to say that GDP = welfare? I thought GDP was just an imperfect mean to track an economy across time and to do comparisons across countries.

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